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Inventory Control Systems

As demand and lead times are variable, we can either

order fixed quantities of stock at variable times or
order variable quantities at fixed times
Fixed quantity systems (Re-order levels)

easy to manage
cope well with demand variability/changes and facilitate lower stocks
orders can also be processed for convenience e.g. small orders can be consolidated to secure supplier discounts.
Using EOQ, fixed systems initiate replenishment orders when stock falls below a pre-determined (re-order) level. Re-order level is calculated as mean demand during the mean lead time, plus the safety stock. As a rough indicator, half the mean lead time usage can be taken as the safety stock (RoL = I.5DL).

Two-bin replenishment system

Imagine two equally sized bins (bays, pallets or similar) used for storage in the warehouse or at the workstation storage point. The ROL be thus be seen visually. With the first bin empty, a new full bin is "called" to arrive before the second bin is exhausted. The call is rotated. With proper rotation system is efficient (little paperwork). In a computerised enviroment the bins/pallets themselves can be bar coded and their movement/position and batch numbers of bin components can be traced.

Stock records

A two bin system works is suited to components needing to be issued in large quantities and where the bin size and hence ROL can be checked simply. With many stock items this is inappropriate. More detailed control over issues is needed hence a stock record system showing receipts/issues and balance is required. Paper or computer records require time to check stock against reorder levels. There may be differences between the physical or actual stock and the book stock. "The record says we have 5 in the warehouse but I could only find three and one of these was damaged". Computerised systems enable replenishment orders to be raised as soon as stock falls below a reorder level.

In a supermarket, the record for each stock item is decremented as each sale is logged at the checkout. With computer interconnectivity, the regional warehouse receives the store's replenishment needs and makes up a replenishment package for next day delivery. Periodic stock checks to count the stock physically enable the store to feed in adjustment figures to reconcile physical against book stock. Thus stock losses can be accounted for.

Such systems assist with demand forecasting. Up-to-date demand figures feed in to reorder level and order quantity calculations.

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Fixed time/order cycle systems

Annual requirements for low value, low bulk items can be estimated and ordered in a routine re-order cycle.

We may need to set a maximum stock level (average demand + safety stock). At the routine re-order time current stock can be subtracted from the maximum to give the order quantity (frequency of ordering could be based on EOQ).

Safety stock must accommodate unexpected increases in demand and the risk of stock-out situation. Compare this to a re-order level system where the risk is limited only to variations in demand in the lead-time period. For a fixed time, re-order cycle system the time at risk is re-order lead time plus the re-order cycle time. Calculation of the maximum stock level formula gives a higher level of safety stock.

Comparing Responsiveness as demand changes

Re-order level approach
- average stock levels stay more or less the same and are less responsive to changes in demand. There is a risk of stock outs with inexpected rising demand but outstanding re-supply orders can be chased.

Re-order cycle systems
- rising demand can exhaust stocks with no outstanding orders in the pipeline.

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Which System?

Of the systems (annual demand, two-bin, re-order cycle, re-order level) none are universally versatile. Many organisations operate a hybrid. Choosing between fixed quantity or fixed time approaches depends on risking unexpected movement in demand against the costs of administering convenient, scheduled replenishment. The safety stock penalty of fixed re-order cycle methods worsens as stock usage value and demand variability rise. Generally fixed time systems suit stock with stable/predictable demand patterns and low usage values.

Risk and security.

Most cost benefits arise from attention to stock items of highest usage value where most costs lie (some lower value/usage items may be critical also e.g. key spares). Theft is always a risk even for bricks and JCB's stored on company building sites. Accurate stock records assist with security monitoring (detecting thefit) and control. A two-bin or annual demand system offers little security for high value, important, difficult to supervise items.

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